Russia's Political Tool; Gazprom Threatens To Increase Gas Prices By 37 Percent To Ukraine

Just days after the head of the Russian state-owned company Gazprom threatened to cut natural gas supplies to Ukraine, officials say the energy company is likely to increase prices by about 37 percent.

Prices could rise from $268.50 to $368.50 per 1,000 cubic meters of the fuel in the second quarter, Ukrainian Energy Minister Yuri Prodan said on Sunday, as reported by Interfax news agency.

Since ousted Ukrainian President Viktor Yanukovych fled to Russia in late February, Ukraine hasn't paid its gas bill that the company said is worth $2 billion.

“Either Ukraine makes good on its debt and pays for current supplies, or there is risk of returning to the situation of early 2009,” Gazprom’s CEO Alexei Miller threatened on Friday. Gazprom in 2009 cut gas supplies to Ukraine over price disputes.

In light of the recent threats, Ukraine has remained silent especially as Russian troops threaten military force on Ukraine’s autonomous region of Crimea.

Yanukovych agreed in December to a $15 billion Russian aid package, which included a 30 percent discount on natural gas. Many Ukrainians saw this as an exchange for backing out of a deal that would integrate Ukraine more closely with the European Union. With Yanukovych out, the deal with Moscow was left in doubt.

Interestingly enough, some energy security experts believe that Russia’s threats may be empty as it may lose money if it follows up on cutting supplies. It's also one reason why experts believe Russia will deescalate the conflict.

If gas supplies are disrupted or if tensions escalate further, it could cost OAO Gazprom (MCX:GAZP) $20 billion and eliminate $6 billion worth of customs duties for Russia, possibly bankrupting the company, Mikhail Korchemkin, the executive director of East European Gas Analysis, told International Business Times.

That means there will be less revenue for a company that makes up nearly 8 percent of Russia’s gross domestic product as well as a significant portion of the state's budget revenues, and that’s why Russia believes “Gazprom is more valuable than Crimea,” Korchemkin said.

But if Russia did decided to shut off gas supplies, the European Union's executive arm said it would assist Ukraine by reversing existing flows back to Kiev.

“In the short term, the [European] Commission is ready to assist Ukraine in diversifying its gas supply routes, notably by ensuring that reverse flows with the EU, notably via Slovakia [in addition to Poland and Hungary, as is currently the case], can be operationalized as soon as possible,” the commission said.

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(Note: Natural gas in the Ukraine photo by Shutterstock.com.)